Delphi Corp. and a number of its former senior executives, most prominently CEO J.T. Battenberg and CFO Alan Dawes, were accused of securities fraud by the SEC in connection with the company's accounting for four transactions. The SEC Litigation Release (here) describes the four items that affected the company's earnings, revenue, or cash flow:

In 2000, Delphi engaged in two fraudulent accounting and disclosure schemes, which had the purpose of and ultimately resulted in Delphi hiding a $237 million warranty claim asserted by its former parent company and inflating its net income by $202 million.

In the fourth quarter of 2000, Delphi entered into two improper inventory schemes, through which it agreed to sell approximately $270 million of metals, automotive batteries and generator cores to two third parties at year end, while simultaneously agreeing to repurchase the inventory in the following quarter for the original sales price, plus interest charges and structuring fees. The purpose and result of the schemes was for Delphi to inflate its cash flow from operations by $200 million, engineer $270 million in inventory reductions and improperly report $80 million in net income.

In the fourth quarter of 2001, Delphi solicited a $20 million lump sum payment from an IT company in return for Delphi providing new business to the IT company. Delphi agreed to repay the $20 million over five years, with interest, which made the payment, in substance, a loan to the IT company. However, in order to meet earnings forecasts for the quarter, Delphi improperly accounted for the $20 million payment as if it was a nonrefundable rebate on past business, rather than a liability.

From 2003 to 2004, Delphi hid up to $325 million in factoring, or sales of accounts receivable, in order to improperly boost non-GAAP, pro forma measures of Delphi's financial performance that were relied upon by investors, analysts and rating agencies. Hiding this factoring allowed Delphi to overstate materially its "Street Net Liquidity," a pro forma measure, during that two-year period. In addition, in one quarter, Delphi also manipulated the hidden factoring to create a false $30 million boost in its "Street Operating Cash Flow," another pro forma measure.

Note that the transactions appear at the end of the year, or bridge two years, so that the prior year's financial statements were dressed-up for Wall Street. The numbers involved are not all that large, at least for a company with billions of dollars in annual revenues, but the deals provided the last little bit of earnings to make the quarterly/annual numbers, or hide problems in Delphi's auto parts business from Wall Street, at least for a little while. The company entered bankruptcy in 2005, and by settling the SEC action it gets itself all ready to emerge from that process, most likely under the control of a private equity firm. The firm will not have to pay a penalty, and the Litigation Release notes that Delphi's cooperation in the investigation earned it a pass on having to make a payment.

The 2000 warranty issue implicates Delphi's former parent, General Motors, in the accounting issues. According to the SEC's complaint (here), Battenberg and Dawes met with GM executives to resolve a dispute about how much Delphi owed GM for warranty claims from before the spin-off. At a meeting, GM executives apparently suggested "asymmetrical" accounting for the payment so that the effects on each company would appear differently. Needless to say, such a suggestion, if true, would cast doubt on GM's books if it did not properly record the transaction in order to help Delphi hide the true nature of the $237 million payment to settle the claim.

Naming Delphi's former CEO Battenberg, who retired just before disclosure of the SEC investigation, shows that the SEC is serious about holding senior management responsible. The only high level executive to settle the case was former CFO Dawes, who agreed to a a five-year ban from serving as an officer or director of a public company, and to pay disgorgement of $253,000, interest of $134,000, and a $300,000 penalty. The company's former chief accounting officer and its treasurer are also named and have not agreed to settle. Dawes will likely play a key role in the case, assuming he is cooperating. There is an ongoing grand jury investigation of the transactions, and Dawes may have agreed to a guilty plea in that phase if there is sufficient evidence of criminal conduct, which would probably entail cooperation in any criminal and civil cases. Once again, the former CFO can be the key witness in an accounting fraud case that targets the CEO of a company. (ph)

Cooperation is the watchword in the options back-dating cases, as corporations almost fall all over themselves promising to provide any necessary assistance to the SEC and U.S. Attorney's Offices that have come knocking on their doors. When the company's internal investigation hits a roadblock, then the individual is usually shown the door, which can even happen to a company's former CEO and current board member. Monster Worldwide, Inc. announced that "[o]n October 29, 2006, Andrew J. McKelvey resigned as a member of the Board of Directors of Monster Worldwide, Inc., effective immediately. Mr. McKelvey also resigned immediately as Chairman Emeritus of the Company. Mr. McKelvey’s counsel advised the Special Committee of the Board reviewing stock option grants that Mr. McKelvey had declined to be interviewed by the Special Committee on the previously agreed date and Mr. McKelvey would not provide assurance that he would appear at a later date." Interesting that someone would resign on a Sunday, not a normal business day.

An 8-K filed by Monster Worldwide includes a letter (here) from McKelvey's lawyer -- who is no doubt being paid by the company -- to the law firm conducting the internal investigation explaining the reason why his client would not be appearing for the interview and would not do so in the near future:

It had been our hope that notwithstanding our recent entry into the case we would be able to provide you with at least a preliminary assessment of the facts within the existing schedule. We have come to conclude, however, that despite our best efforts, and despite the valuable assistance you have provided in the form of documents and information, we need a good deal more time to get up to speed on this fact-intensive matter that covers a period of many years. As a result, I have reluctantly decided that we cannot go forward with tomorrow’s meeting. And, notwithstanding Mr. McKelvey’s desire to help, as his lawyer I cannot provide you with assurances that you will be able to have such a meeting with him in the future. You and outside counsel for the company have told us about certain topics that are a priority for you and we are ready to try to find a way to provide you with whatever information we can. I hope you will agree at least to proceed in that way. Once again, I regret that we are unable to meet tomorrow, but hope you understand the difficult situation we face and the fact that we cannot effectively represent our client when we do not have a firm grasp on the facts of the case.

Because Mr. McKelvey understands that my inability to meet with you is contrary to the wishes of the Special Committee, and because he continues to have the best interests of the company very much at heart, he today has submitted with regret his resignation as a Director of Monster Worldwide, Inc. and as Chairman Emeritus.

No one actually believes the second paragraph, but it sure sounds nice. This would not be an interesting story, except for the final paragraph of the letter -- also dated October 29, which means there were lots of those nice weekend billable hours. The letter discusses a meeting over the summer between counsel conducting the internal investigation and McKelvey that may have involved some answers that, in hindsight, might be construed as less than completely correct:

During your meeting, Mr. McKelvey was asked questions that he understood were designed to assess whether people in the company had engaged in improper options “backdating,” and whether he knew that such a practice was improper when it occurred. In retrospect, he recognizes that he misunderstood your questions and focused too narrowly on the issue of whether he knew at the time that improper conduct had occurred, and not on the more general issue of whether backdating had occurred. During the time period relevant to your questions, he did not understand that it was improper for the exercise price of stock options to be different than the price on the grant dates, nor did he understand that there were legal or accounting implications associated with that difference. Mr. McKelvey hopes that this clarifies any misperceptions that may have been created during his meeting with you in July.

I think this is a bit of an Emily Litella moment -- "never mind" -- or the equivalent in golf of a mulligan. Monster Worldwide has not issued its final report on options practices at the company, but McKelvey's counsel may be looking down the road at how the SEC and U.S. Attorney's Office views the conclusions of the internal investigators. Being branded as less-than-truthful is not how lawyers want their clients portrayed. Peter Lattman on the Wall Street Journal Law Blog has an interesting post (here) on McKelvey's resignation. (ph)

International shipping company Stolt-Nielsen S.A. lost out on its bid to have the Supreme Court review a Third Circuit decision overturning an injunction against the Department of Justice that prohibited it from seeking an indictment of the company for antitrust violations. Stolt-Nielsen had participated in the Antitrust Division's amnesty program that rewards the first company to report a violation with immunity from prosecution, but after it provided documents the DoJ decided that the firm had not been cooperative and began the process of seeking an indictment. A district court granted an injunction prohibiting an indictment, but the Third Circuit reversed on the ground that a federal court does not have the authority to stop the Executive Branch from pursuing a criminal prosecution. A grand jury then handed up an indictment in August 2006. The Supreme Court denied Stolt-Nielsen's petition for certiorari (here) without comment. With the case now on the road to trial, the company will pursue a motion to dismiss the indictment on the grounds that the decision to revoke the immunity was improper. A press release (available here) states:"The Company plans to file its motion to dismiss the indictment on November 22nd in accordance with the scheduling order issued by the United States District Court for the Eastern District of Pennsylvania. As we have said previously, it is critical for the Justice Department to honor the solemn promises it makes." (ph)

Michael Pickens, the son of famed corporate raider T. Boone Pickens, entered a guilty plea to three counts of securities fraud. The government brought the charges in July 2005 (see earlier post here) related to a scheme to send out hundreds of thousands of faxes containing purported inside information about small companies, and the faxes were made to appear to be misdirected to the wrong number. Gullible recipients who thought they'd stumbled on the next big investment opportunity bought the shares that allowed Pickens and his cohorts dump their stock in the companies at inflated prices. Pickens was also involved in a bizarre case in Connecticut in June 2006 when he was charged with burglarizing a fly fishing store (see earlier post here). In the securities case, he is looking at a sentence around five years. An AP story (here) discusses the guilty plea. (ph)

A New York Times article (here) discusses growing efforts to cut back on investigations and enforcement actions against corporations and related professionals on both the civil and criminal front. While vague about any actual proposals, the article discusses various groups that are looking to adopt changes in the Sarbanes-Oxley Act, particularly the internal controls provision in Section 404, and issues related to the Thompson Memorandum concerning waiver of the attorney-client privilege and payment of attorney's fees for individual officers and directors. In a sense, none of this is particularly new. The push-back against Section 404 has been going on for the past two years as companies experience the costs of the internal controls required to meet the regulatory requirements and encounter problems with auditors who will fly-speck corporation books to limit their own potential liability. The Thompson Memorandum has been attacked on a number of fronts, and an earlier post (here) quotes Senator Arlen Specter that he plans to introduce legislation to prohibit consideration of waiver of the attorney-client privilege and attorney's fee payments when prosecutors decide whether to charge a corporation with a crime.

The Times article sheds light on new efforts to constrain the ability of state Attorney Generals -- read Eliot Spitzer -- to bring broad charges against large businesses under state law. Much like the cut-backs in private securities litigation (PSLRA and SLUSA), this would likely involve federalizing certain areas that would deprive the states of their jurisdiction over certain industries or transactions. The problem with such an approach is that the states and their AGs could find ways around federal laws, and it's not clear whether such legislation could pass without expanding the federal law enforcement bureaucracy, which seems to run counter to the proposal's goal. Another issue mentioned in the article is a recommendation to prohibit private parties from filing Section 10(b)/Rule 10b-5 securities fraud actions, leaving only the SEC to enforce the broad antifraud provision. This would be truly radical because private actions far outnumber the enforcement cases filed by the SEC, and some significant recoveries in private securities fraud actions have provided relief to investors (and the lawyers, too). Given the Commission's limited resources, many cases would never end up in court, and perhaps never even be investigated. As I recall, the Commission has fairly consistently supported the private right of action under the securities laws, so it would likely oppose such a move. Moreover, as discussed in earlier posts (here and here), Congress has harped on the SEC's failure to police hedge funds and pursue insider trading cases with sufficient vigor, so adding to the agency's workload by giving it exclusive power over Rule 10b-5 cases without a commensurate expansion of its budget might not be politically palatable.

No specific recommendations have appeared, and legislative or administrative proposals have not been unveiled, so there is no way to know what will be offered in the name of reform. One problem for any set of proposals is that they must avoid being labeled the "Corporate Crime Relief Act of 2007" or, worse, the "CEO Get-Out-Of-Jail-Free Act" if they appear to be too favorable to companies and executives. With soaring CEO pay in the news amid options-timing cases that are starting to pop to the surface, this might not be the best time to recommend changes that make it significantly more difficult to investigate corporate misconduct. (ph)

Former Computer Associates, Inc. CEO Sanjay Kumar will be sentenced on securities fraud and obstruction of justice charges related to accounting fraud at the computer software company now known as CA Inc. Kumar entered a guilty plea after being indicted along with the company's former general counsel for participating in an ongoing fraud that involved booking revenues in one quarter even though the contracts had not yet been concluded. In what was called the "CA Way" the company had "35-day months" at the end of quarters when sales made five days into the next month would be counted in the previous month, thereby increasing the revenue for that period. Kumar was also involved in back-dating other contracts and sending the GC to Hawai'i to bribe a potential witness in the case. An interesting aspect of the obstruction charges was that the government included in the description of the offense efforts to mislead and lie to the outside law firm hired by the company to conduct the internal investigation on the ground that Kumar knew the misstatements would be given to prosecutors. A Wall Street Journal article (here) notes speculation that Kumar will receive a term between eight and twelve years. One variable is whether the district court will impose a higher sentence because of the obstruction of justice, the type of charge that tends to have a very negative effect on judges. (ph)

The Government Accountability Office will take a look at the SEC's enforcement program in response to a letter from Senator Charles Grassley regarding how the Commission is pursuing insider trading and other types of securities fraud cases. A Bloomberg story (here) discusses the Senator's request. The letter came as a result of charges leveled by former Enforcement Division attorney Gary Aguirre, who claimed that an insider trading investigation of hedge fund firm Pequot Capital Management and Morgan Stanley CEO John Mack was snuffed out due to outside pressure that prevented him from taking testimony from Mack. After a Senate Judiciary Committee hearing on regulation of hedge funds that included Aguirre as a witness, the Commission subsequently went through with the deposition of Mack in August 2005. Shortly thereafter, the staff determined that it would not recommend that civil charges be filed (see earlier post here).

The GAO audit will no doubt increase the pressure on the SEC to process its cases more quickly and perhaps cut down a bit on the bureaucracy that builds up in any agency over time. A Wall Street Journal story (here) notes that the number of enforcement actions has dropped since its peak in 2003, and likely will be below 600 for the 2006 fiscal year that ended on September 30. Whenever the numbers fall, there are questions raised about the agency's effectiveness, and those issues become more troublesome after the SEC had its budget increased in order to police the markets more closely.

Simply counting the number of cases filed may not be the best way to measure an agency's effectiveness, and I suspect one result of the GAO (and congressional) scrutiny will be to push cases through to show a quick response to any potential weaknesses in the Enforcement Division's management. The Commission has investigations of over 100 companies for options back-dating, and while a few of those will produce criminal charges, a number will likely result in administrative actions at a minimum because of the false financial statements, and perhaps could even lead to civil enforcement actions for securities fraud. That probably means there will be a cascade of cases over the next year, especially to pump up the numbers for FY2007 to have the groundwork ready for when the GAO issues its report. There is no better way to respond to criticism than to point to current numbers and note an increase in the number of cases, just like corporations do when reporting their quarterly financials. Unfortunately, when the heat is on to generate "stats" for Congress, the quality of the cases may not mean as much as getting a quick settlement. Like all types of law enforcement, there is an ebb and flow to the cases, and look for the flow to be heavier over the next twelve months . . . almost like channel-stuffing. (ph)

Professor Brandon Garrett of the University of Virginia School of Law has posted an article on SSRN (here) on deferred prosecution agreements that will appear in the Virginia Law Review in 2007. Professor Garrett analyzes the deferred prosecution agreements the Department of Justice has entered into with a number of companies over the past few years, and looks at how the agreements are targeting changes in internal corporate governance. He questions whether prosecutors may be abusing their power by inserting unrelated terms into such agreements, which do not have the benefit of judicial review. The abstract of the article states:

In what I call a structural reform prosecution, prosecutors secure the cooperation of an organization in adopting sweeping internal reforms rather than seek its conviction for criminal acts of its agents. Dozens of leading corporations in the past few years entered into demanding settlements with federal prosecutors, including AIG, American Online, Bristol-Myers Squibb Co., Computer Associates, HealthSouth, KPMG, MCI, Merrill Lynch & Co, Monsanto, and Time Warner. Nevertheless, no scholars have considered the problem of prosecutors seeking structural reform remedies. I conducted an empirical study of the terms in the agreements the DOJ has negotiated to date, which reveals that federal prosecutors consistently imposed deep governance reforms, but also unrelated terms indicating potential abuses of their power. Unlike in civil rights cases that long accomplished court-supervised institutional reform, prosecutors designed settlements to avoid judicial review of their terms or implementation. We should carefully examine this bold new prosecutorial mission because it fundamentally transforms federal criminal law, affects entire industries, and yet appears to lack any due process safeguards. I frame and evaluate five models that prosecutors can adopt to pursue structural reforms. Prosecutors have chosen the model that departs most radically from prior federal organizational criminal law. I conclude that in time, however, judicial limits will constrain prosecutorial discretion and result in a more effective regime for deterring organizational crime.

The prosecution of I. Lewis Libby, former chief of staff to Vice-President Dick Cheney, has been in an extend quiet period but reemerged at a hearing in U.S. District Court on October 26. One of the defenses to the perjury and false statement charges has been the "honest-but-overworked-civil-servant" claim, that Libby's misstatements to the grand jury and federal agents were the result of his having wide-ranging responsibilities so that he simply forgot what he said. The defense is premised on the fact that former CIA agent Valerie Plame's identity was of no real interest to him, and therefore he misspoke but did not intend to mislead.

In furtherance of that position, the defense is seeking to use an expert on memory, Dr. Elizabeth F. Loftus from the University of California-Irvine. The government challenged the defense effort to call Dr. Loftus as a scientific expert who would testify that jurors do not understand the limits of memory and that she can explain how a busy person like Libby could have simply forgotten what he said to reporters about Plame. Special Counsel Patrick Fitzgerald apparently had a field day cross-examining Dr. Loftus, according to a Washington Post story (here).

Among other things, Fitzgerald got Dr. Loftus to admit that her methods are not particularly scientific, which may well be the kiss of death for calling her as an expert under Daubert. In a backhanded way, she may have established the point about faulty memory. Fitzgerald asked her whether they had ever met, to which Dr. Loftus stated they had not. At that point, Fitzgerald asked about a case in New York in which she testified for the defense, when he was an assistant U.S. Attorney and cross-examined her. Rather than simply not remembering, perhaps Dr. Loftus wiped that memory clean.

It certainly does not help an expert on memory to be unable to recall someone who cross-examined her once before and to admit that her conclusions are not the result of a rigorous scientific analysis. Whether that keeps her from testifying is another matter. It may be that U.S. District Judge Reggie Walton will permit Dr. Loftus to give limited testimony on memory issues so that there is not a complete denial of evidence on the question that can be raised on appeal if there is a conviction. I'm hopeful Dr. Loftus remembers to submit her bill for the time spent in Washington D.C. at the hands of the Special Counsel. (ph)

David Safavian received an 18-month prison term for obstruction of justice and making false statements to federal agents in connection with an investigation of lobbyist Jack Abramoff. Safavian participated in the Scotland golf trip that has also ensnared Ohio Congressman Bob Ney, who entered a guilty plea as part of the widening investigation of Capitol Hill corruption. The sentence handed out by U.S. District Judge Paul Friedman fell between the government's request for a sentence under the Guidelines of 30-37 months and Safavian's request for probation or home confinement. According to an AP story (here), the Judge found that Safavian's testimony at trial was "incredible" and "hard to believe" but did not apply the two-level sentence enhancement for perjury. Judge Friedman followed the Sentencing Guidelines in imposing the sentence without applying any of the enhancements that government sought that would have increased the prison term.

At the hearing, the Judge seemed to be asking Safavian to take some responsibility for what he had done. While Safavian said that he was "contrite" for what he did, Judge Friedman said, "Get up here and tell me, 'I agree I concealed. I agree I obstructed justice,' . . . I don't believe he's done that." While the Judge might hope to hear such a statement, Safavian's defense at trial was that he did not do anything wrong, so it may be unrealistic to think that he would do a complete about-face that would undermine his appeal that there was insufficient evidence of his intent to obstruct justice and lie. (ph)

Bristol-Myers Squibb has run into some rough times dealing with the Department of Justice after thinking it had left those troubles behind when it entered into a deferred prosecution agreement in June 2005. That case involved "channel stuffing" by the company to pump up its revenue figures, and resulted in a settlement with the SEC and the agreement with the U.S. Attorney's Office for the District of New Jersey. In July 2006, however, it came out that the company's purported agreement to keep a generic version of Plavix, a major revenue source, from the market was the subject of an antitrust investigation by the Department of Justice. That led to the termination of CEO Peter Dolan after the compliance monitor appointed as part of the deferred prosecution agreement, along with U.S. Attorney Christopher Christie, recommended his removal for the Plavix affair (or fiasco, if you prefer). Now comes the latest disclosure that the USAO's criminal investigation includes looking into whether the conduct related to Plavix violated the injunction issued as part of the SEC case, which could subject Bristol-Myers to a criminal contempt. A company press release (here) describes the state of the investigations:

As previously disclosed, the Antitrust Division of the United States Department of Justice is conducting a criminal investigation regarding the proposed settlement of the pending PLAVIX® patent litigation with Apotex. The company is cooperating fully with the investigation. It is not possible at this time reasonably to assess the outcome of the investigation or its impact on the company. It is also not possible at this time reasonably to assess the impact of the investigation, if any, on the company’s compliance with the Deferred Prosecution Agreement (DPA) with the United States Attorney’s Office for the District of New Jersey (USAO). Also as previously disclosed, the USAO initiated an investigation that is being conducted by the Monitor and the USAO into corporate governance issues relating to the company’s negotiations of the proposed settlement with Apotex. This investigation has been expanded to include a review of whether there was any violation of Federal securities laws in connection with the proposed settlement with Apotex under the terms of the previously disclosed Consent Order the company entered into with the U.S. Securities and Exchange Commission in August 2004 (SEC Consent). It is not possible at this time reasonably to assess the outcome of the investigation or its impact on the company. (Emphasis added)

The SEC Litigation Release (here) from August 6, 2004, describes the settlement that included "a permanent injunction against future violations of certain antifraud, reporting, books and records and internal controls provisions of the federal securities laws." This sounds like the standard, broad "sin no more" injunction agreed to in many cases. The problem for Bristol-Myers is that the company's disclosures about potential threats to its Plavix sales may have been inadequate and the negotiations for the ill-fated agreement to keep the generic version off the market should have been disclosed earlier. Disclosure problems in turn may violate the books and records and internal control provisions of the securities laws, which the company is enjoined from doing. As discussed in an earlier post (here), a violation of the securities law may also violate the deferred prosecution agreement and could restart the channel-stuffing case along with anything that might arise from the Plavix investigation. The company would have virtually no defenses on the channel stuffing after having admitted its liability as part of the agreement with the USAO. Look for Bristol-Myers to be more than cooperative in this new investigation in order to avoid any thoughts that it violated the terms of the deferred prosecution agreement. (ph)

Former White House aide David Safavian faces sentencing for his conviction on four counts of obstruction of justice and false statements related to his contacts with former superlobbyist Jack Abramoff. Prosecutors have requested that the court apply the Sentencing Guidelines, which calls for a sentence in 30-37 month range, while defense counsel have asked for probation or home confinement. Safavian has received support from his former Capitol Hill boss, Utah Representative Chris Cannon, who sent a strong letter urging a light sentence. The letter takes an approach quite different from that seen in Congress in support of longer sentences and greater adherence to the Sentencing Guidelines:

As a member of the Judiciary Committee, I have personally struggled with sentencing issues, particularly post-Booker although certainly not to the extent you have. This episode has punctuated for me the importance of taking into account all facets of a person and the unique facts of each case, when determining what the proper and just punishment should be.

Has David made mistakes? Of course. But as you consider his sentence, I hope you will keep some of my personal observations in mind. This is a decent man who made an error in judgment. He has paid a terrible price and will continue to do so for the rest of his life. Separating him from his wife (who is also in public service) and his three-year old daughter will not do anyone any good.

The approach urged by Representative Cannon is almost the exact opposite of the Guidelines, which largely ignore "all facets of a person and the unique facts of each case." It will be interesting to see if this is a one-shot situation to help out a former aide -- Safavian served as Cannon's chief of staff -- or a signal that Congress will not move to make the Guidelines "topless" or limit judicial discretion after Booker. A Salt Lake City Tribune article (here) discusses Representative Cannon's letter and the sentencing. (ph)

A common means of committing a fraud is to target small groups with whom the perpetrator shares a common characteristic that engenders a degree of trust. Many frauds prey on ethnic groups, as demonstrated by an SEC civil injunctive action filed against Hyun Soo Jang and Kangsan Kim for targeting Korean investors in the Los Angeles area. According to the SEC Litigation Release (here), Jang and Kim operated through two now-defunct securities firms, Unus Capital Management, Inc. and PeopleN Investment Corp., to defraud forty investors of approximately $4.5 million. According to the SEC:

The complaint alleges that Jang and Kim did not use investor funds to purchase securities as promised. Instead, according to the complaint, Jang, age 39, formerly of Los Angeles, Calif., and Kim, age 34, of Anaheim, Calif., misappropriated the funds entrusted to them, including about $2.5 million taken by Jang, and $500,000 taken by Kim and Unus. The complaint also alleges that Jang used an additional $500,000 to repay existing investors with money that had been deposited by new investors.

The Commission's complaint alleges that, between January 2003 and August 2005, Unus attracted investors through broadcasting morning stock market reports hosted by Jang and Kim that were aired on Korean-language radio stations. As alleged in the complaint, after being contacted by interested investors, Jang and Kim falsely portrayed Unus and PeopleN as established and regulated entities. The complaint alleges that Jang and Kim misrepresented PeopleN as a broker that was registered and a member of various securities industry organizations, such as the New York Stock Exchange, the Securities Investor Protection Corporation and The Nasdaq Stock Market, Inc. In addition, the complaint alleges that Jang and Kim continued to hold out Unus as a registered investment adviser even after the firm had withdrawn its registration with the California Department of Corporations.

Interestingly, the Commission also issued its Litigation Release in Korean (here). (ph)

The fallout from the collapse of futures-trading firm Refco in October 2005 has hit in Austria, where prosecutors in Vienna charged nine individuals for their role in transactions between Refco and Austrian bank Bank Fuer Arbeit und Wirtschaft AG (BAWAG) that led to large losses at the bank. BAWAG lent former Refco CEO Phillip Bennett over $400 million right before Refco's collapse, which he used to repay debts owed to Refco that were not properly accounted for by the firm. It turns out BAWAG had significant losses on trading by Wolfgang Floettl, son of a former CEO of BAWAG, in Refco accounts. The charges include embezzlement, fraud, and false entries in the bank's books, and the defendants include Floettl, two former chief executives, and an auditor from KPMG's Austrian branch. An AP story (here) discusses the charges.

Back in the U.S., federal prosecutors said in court that a new indictment will be filed in the next two weeks in prosecution of Refco executives, which comes on top of a new indictment on October 24. Bennett and former Refco CFO Robert Trosten both entered not guilty pleas to the most recent indictment, and it's not clear whether the new indictment will include additional defendants. Given the speed with which Refco collapsed, less than a week, it is not surprising that the investigation has taken time to sort out how it's demise occurred so quickly. The quick filing of charges against Bennett in November 2005 has meant that prosecutors will have to deal with an increasingly exasperated judge who wants the case pushed along, according to a New York Post story (here). (ph)

The New York State Ethics Commission issued a report accusing Comptroller Alan Hevesi of misusing state resources for his own benefit. The report comes only two weeks before the election. The violation centers on his use of a state chauffeur for his wife, purportedly because of "threats" that were never substantiated, and a low-ball repayment to the state for the benefits. According to the report (here):

The relevant facts are not in dispute. The record demonstrates that Mr. Hevesi, as both City Comptroller and State Comptroller, used a government employee under his supervision to provide transportation for his wife. In each instance, he did not makereimbursement until the issue became a matter of public concern. As he acknowledges, no records exist at OSC upon which an accurate accounting for those services can be made. Because Mr. Hevesi’s recent $82,688.82 reimbursement is based in its entirety on the recollection and rough estimates of Acquafredda [the chauffeur], the Commission cannot endorse this estimate.In fact, the Commission believes that this estimate understates the cost of all State services provided to Mrs. Hevesi. Moreover, the OSC’s failure to keep any record that would allow for proper reimbursement suggests that Mr. Hevesi did not intend to reimburse the State.

The record in this case does not support Mr. Hevesi’s assertion that there was a nexus between his role as Comptroller and any threats to Mrs. Hevesi’s safety. There were no threats of any kind to Mrs. Hevesi, and any threats to Mr. Hevesi, to the extent they existed, did not warrant special protection for Mrs. Hevesi.

A Rochester Democrat & Chronicle article (here) notes that Hevesi defended himself at a debate, citing his wife's poor health and noting that any threat against him was also a threat to his family. His opponent in the Comptroller election, J. Christopher Callaghan, has called for Hevesi to resign. Governor George Pataki will decide soon whether to initiate impeachment proceedings. Quite a way to move into the last days of a campaign. (ph)

With more companies doing business abroad, it becomes more important to understand international criminal laws. According to the New York Times here Royal Dutch Shell is having to deal with Russian authorities to avoid criminal prosecution of some of its employees. The issue for Shell and two partners from Japan relates to environmental laws.

A former partner at the law firm of Kirkland and Ellis was convicted of tax evasion for selling a "fraudulent CD from which he received approximately $1.8 million dollars," and then hiding the income from the government. The DOJ press release is here.

Unlike some defendants who are immediately taken into custody upon conviction, Jeffrey Skilling has a little bit of remaining time in the semi-free world. He was ordered to report to prison once the Bureau of Prisons has assigned him to a facility. He was not given bond pending the appeal.

The Houston Chronicle here has an interesting story on Jeffrey Skilling's choice of prison. And if given this placement, he will be in a place with at least one other mentioned on this blog (Former Rep. Randy "Duke" Cunningham). Wall Street Jrl blog reports here that he is going to the Federal Correctional Center in Butner, N.C. (see here)

As expected (here), Comverse CFO David Kreinberg plead guilty. He plead guilty to "a two-count felony information charging one count of conspiracy to commit securities fraud, mail fraud, and wire fraud, and one count of securities fraud." In addition to the guilty plea, he also settled civil matters the SEC. The DOJ press release states here that the agreement

"provides for a permanent injunction enjoining him from violating or aiding and abetting violations of the antifraud, reporting, record-keeping, internal-controls, false-statements-to auditors, Sarbanes-Oxley certification, and ownership-reporting provisions of the federal securities laws; a permanent officer-and-director bar; the payment of $2,394,917.68 in disgorgement and prejudgment interest; and a permanent suspension from appearing or practicing before the Commission as an accountant."

This stresses the importance of thinking globally in settling white collar cases. One cannot just think in terms of the criminal action, but also it is necessary to think about the civil ramifications and collateral consequences that can accrue to the individual.

The Wall Street Journal here has a list of companies, and here a list if individuals who have come under scrutiny related to stock options.

The Wall Street Jrl reports here that the former CFO of REFCO was indicted. The press release of the U.S. Attorney's Office for the Southern District of New York states the Robert C. Trosten was indicted for his alleged:

"participation in a scheme to defraud Refco’s investors that resulted in losses of more than one billion dollars. TROSTEN is charged with assisting PHILLIP R. BENNETT, formerly Chief Executive Officer of Refco, in hiding from Refco’s auditors and investors hundreds of millions of dollars of debt owed to Refco by a company controlled by BENNETT."

The new indictment also added new fraud charges against former CEO of Refco Phillip R. Bennett.